Bank of Canada Shouldn't React Too Hastily to Higher Inflation, Says National Bank

08:59 AM EDT, 03/30/2026 (MT Newswires) -- With the current geopolitical imbroglio in the Middle East having driven crude oil prices violently higher -- among other commodities -- more inflation is on the way, said National Bank of Canada.

The full magnitude and duration of the unfolding oil-related inflation shock remain to be seen, hinging on when and in what fashion the Strait of Hormuz is ultimately reopened, noted the bank.

Notwithstanding ongoing geopolitical uncertainty -- including conflicting signals from the main protagonists -- global bond markets have rushed to judgment, stated National Bank. In pursuit/defense of price stability mandates, central banks will either need to tighten monetary policy or won't be able to bring forth marginal accommodation. Or so the thinking goes.

A series of near-term interest rate hikes is now expected from both the Bank of England and the European Central Bank. That prospective tightening may be warranted. In the United States, bets on FOMC rate cuts have been roundly abandoned, the latest 'dot plot' ostensibly dead on arrival, pointed out the bank.

In Canada, the monetary policy rethink has likewise been "striking," according to National Bank. Relative to the current policy rate of 2.25%, markets now price a near-3% overnight target by late 2026/early 2027.

Shifting sentiment on the Bank of Canada has driven two-year Government of Canada bond yields almost 60 basis points higher in March, one of the largest monthly selloffs since the last oil-price shock set central banks and fixed income investors on edge, it added.

But this isn't 2022 and the bank believes markets are getting ahead of themselves. National Bank argues that the BoC's Governing Council shouldn't be too hasty in reacting to a headline inflation spike -- unless fresh fiscal stimulus fuels inflation, as it did during the 2022 oil shock. It argues for a more patient policy stance.

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